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Are These ETFs Headed for Pain as Bitcoin Dominance Falls?

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The price of Bitcoin recently went through the roof as it took about three months to cross the difference of $40,000 in value. The cryptocurrency hit the $20,000-mark for the first time on Dec 16 and touched $60,000 on Mar 14. The asset also hit an all-time high of nearly $65,000 in April on the Coinbase IPO success. However, the winning cryptocurrency just had an awful week and probably the worst since February.

Bitcoin slumped below the $50,000 level for the first since Mar 8 on U.S. President Joe Biden’s plan to hike capital gain tax. Bitcoin (BTC) dominance has also fallen below the 50% mark for the first time since 2018. This metric BTC measures the ratio of the largest cryptocurrency's value to the overall market capitalization of digital assets.

Reasons Behind the Slump

Capital Gain Tax Hike Is a Great Negative

President Biden is expected to raise the long-term capital gains tax for the wealthiest Americans to 39.6% from the current rate of 20%, for those earning $1 million or more. This on top of an existing surtax on investment income, will lead federal capital gain tax rates for wealthy investors to as high as 43.4% (read: What Holds for ETFs If Biden Hikes Capital Gain Tax?).

With bitcoin gaining about 383% past year and about 28% this year, the rush to book profits amid the looming investment gain tax hike is understandable.Bitcoin also has broken below its 50-day moving price average on the daily chart in a warning sign of slowing momentum, as quoted on Coindesk. Pankaj Balani, CEO of crypto derivatives venue Delta Exchange, believes that the outlook is bearish for bitcoin, the Coindesk article noted.

Overvaluation Concerns Look Large

Guggenheim Partners’ Scott Minerd, a long-term bitcoin bull, also said last week that the world’s largest cryptocurrency bitcoin is too overvalued, as quoted on CNBC. He sees Bitcoin is “very frothy” and a “major correction” in the near term.

“I think we could pull back to $20,000 to $30,000 on bitcoin, which would be a 50% decline, but the interesting thing about bitcoin is we’ve seen these kinds of declines before,” Minerd said. However, he said he thinks it’s part of “the normal evolution in what is a longer-term bull market,” with bitcoin prices eventually reaching between $400,000 to $600,000 per unit, as quoted on the CNBC article.

Per a market watcher, the current bitcoin price has key support at the $48,000 level. If bitcoin breaks this, a bearish summer could be in the cards for bitcoin with key support to watch around $42,000 and $37,000.

However, the very market watcher also believes that such a correction is needed and inevitable given the fast rise in the cryptocurrency over the past few months. And the current correction will also not be long-standing.

Regulatory Concerns Still Exist

Despite such humongous success noted lately, regulatory concerns are not going away for bitcoin. There have been repeated attempts in the past by ETF issuers to bring an exchange-traded-product on the cryptocurrency. But none received SEC’s nod. The SEC is seemingly looking for more proof of safety in this trade.

ETFs in Focus

Since we don’t have any pureplay bitcoin ETFs now, stocks that are related to bitcoin mining or trading play an indirect role in betting on this crypto asset.Coinbase Global Inc. (COIN - Free Report) known is a U.S. company that operates a cryptocurrency exchange platform without an official physical headquarter.

Coinbase has soared in value in the past year alongside bitcoin and Ethereum but can now see a slump. Coinbase has exposure to funds like Simplify Volt Fintech Disruption ETF (VFIN - Free Report) (7.10% weight) and Renaissance IPO ETF (IPO - Free Report) (6.79% weight).

Blockchain ETFs like Amplify Transformational Data Sharing ETF (BLOK - Free Report) has also benefited greatly on bitcoin success and could thus succumb to a slowdown in the near term.

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